Yves Smith of Naked Capitalism uses the insider trading accusations against Rajat Gupta, former managing director of McKinsey and former Procter & Gamble and Goldman Sachs board member, as a springboard to analyze the role of business consulting. See McKinsey, the Insider Trading Scandal, and the Problems with Consulting. Ms. Smith, a McKinsey veteran, catalogs the rise of her former firm and its current state:
McKinsey at the Beginning
Originally a time and motion study firm, McKinsey evolved to a premiere business consulting firm, selling its high quality, professional studies to large business clients. These studies purported to be fact based, objective analyses, “telling the clients the truth even if they might not like it.” A partner’s goal was relationship building and repeat engagements.
The intellectual heavyweights of the firm were top of the class MBAs from leading business schools.
McKinsey Now
- Partners now consult on a specific problem and maintain relationships with the senior hiring executive to earn repeat business. Does the client now receive unvarnished truth or “leading edge conventional wisdom?”
- Does the firm “add value” or ever change client behavior? On the contrary, I suspect the firm is serving as a kind of corporate therapist, only the patient never gets any better. Again, a great way to earn repeat business.
- With a constant need to perform studies, keep young employees productive and cost effective, McKinsey gravitates to troubled client firms with weak management.
- Despite efforts to maintain consistent professional standards and quality, the McKinsey product has varied widely by partner, with embarrassing episodes of falsified data and poor advice. Ms. Smith points to the AOL-Time Warner merger, Swissair bankruptcy, Enron collapse and other bad business strategies and outcomes as examples of poor consulting work.
- To meet Wall Street competition for MBA’s, McKinsey raised rates and became an aggressive marketer of its services.
- The Rajat Gupta allegations of insider trading undermine the expected trusted relationship between consultant and client.
See McKinsey, the Insider Trading Scandal, and the Problems with Consulting.
The Cult of the Expert
Ms. Smith expertly analyzes McKinsey’s rise and current path. She and I agree McKinsey’s current problems are emblematic of management’s over reliance on outsiders for analysis and decisions appropriately made in-house. At one time or another, my former employers have retained a number of the name brand consulting firms. A couple of first hand observations:
- How naive to believe that freshly minted MBAs with little or no practical business experience can add real value. These neophytes write well, dazzle with mathematical formulas and research, but are short on wisdom, judgment and usable advice.
- Most of consultants’ research studies can be replicated by sending one’s own very bright employees to a corporate or local university library. In fact, I routinely turned down hiring a consultant and used my own staff to research business problems. The results were excellent and very practical. [Note: my staff should produce quicker, better cost-effective results; they know the business and are not billing by the hour.]
- Insecure or weak managements are the target client base for business consultants. Insecure management lacks confidence in its own judgment, thus creating a need for consultant validation.
- The corollary to “insecure management” is “cowardly management.” Unfortunately, many times management demonstrates both traits which opens the door to long-term consulting engagements. Consultants provide “air cover” for this folly: McKinsey is the business version of a “Good Housekeeping Seal of Approval.” In response to internal or external criticism of a business decision, management can respond that “I was merely following McKinsey’s recommendation.”
- McKinsey can also be the CEO crutch to convince a skeptical or spineless Board of Directors to approve an important corporate decision: spin off a division, merge with another company, discontinue a pension plan, increase debt to equity ratios, or other corporate level actions implicating the fiduciary duty of the director to the shareholders. An Ivy League-trained senior consultant, speaking in well modulated tones with multi-industry experience, backed by a wealth of data and analysis, can serve as the “closer” to convince the Board to ratify management’s strategy.
Human Nature
In narrow specialized areas, the cult of the “expert” may be useful. An expert can diagnose a cancer or heart disease and in many cases successfully treat it. Alas, business is not like medicine. Rather, it is a blend of art, science, psychology, economics, mathematics, marketing, law, accounting, finance, experience, and old fashioned common sense. Rarely is there only one right answer. But we are all entitled to our own levels of insecurity. And yes, it is good to have facts and rigorous analysis.
I worked for organizations that over used consultants to the point of undermining and neutering their own senior management. I also worked for an organization that used virtually no consultants; their reluctance reinforced the insularity in their own management group. A well-defined and limited role for a consultant indeed exists. A good consultant can help with areas of uncertainty or in house inexperience or lack of resources. Importantly, a good consultant will even provide a new perspective and derail unproductive in house “group think.”
One of the eternal truths is that no one can guarantee the perfect answer to a business problem. In the end it is a CEO or senior executive who must decide and be held accountable. Jean Francois Revel wrote about the European cult-like infatuation with communism in “Without Marx and Jesus.“ Perhaps we need to debunk the cult of the all-knowing business consultant. Maybe we could prepare a study entitled: “Without McKinsey or the Boston Consulting Group.”
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